RF Capital Group Inc.

Harris Fricker - CEO and President Deb Starkman - CFO

Good morning and thanks for joining us as we walk through GMP's fourth quarter and full year 2017 results. With me, this morning is Deb Starkman, our CFO.

Before we get started, I would like to remind you this call is being webcast and will be available for subsequent replay. Our remarks and answers to your questions today may contain forward-looking information and actual results could differ materially.

Forward-looking information is subject to numerous risks and uncertainties. Certain factors and assumptions applied in the forward-looking information can be found in our 2016 AIF and our 2017 annual MD&A.

These documents are available on our website and on sedar.com. Let's now walk through GMP's fourth quarter and full year results.

The fourth quarter marked a strong finish to what was another challenging year for independent dealers and represented a sharp rebound from the extremely challenging third quarter. The market environment for small to mid-cap equities was a more accommodative to new issuance this quarter.

Specifically, we saw significant trade in blockchain and cannabis offerings. Much of this activity is occurring in the small to mid-cap sector and is being led by GMP.

Our fourth quarter performance evidences the benefits of a leaner GMP. The resiliency of our business and a significant operating leverage built into our franchise over the past several years.

Our business mix, this quarter, also attest to the progress we continue to make in diversifying our business, by building on the strength of our non-commodities franchise as promised. We maintained all along with the earnings power of our franchise, we'll become more evident in better markets and while we recognize that more work is necessary, we're pleased to have generated solid earnings for shareholders in the quarter.

Given GMP's improved operating performance, our very strong capital position and our outlook for the first half of 2018, our Board of Directors declared a special cash dividend of $0.10 per common share available on April 2, 2018. As our future results allow, we plan to continue to return excess capital to our shareholders.

GMP earned net income of $6.4 million this quarter, up from $3.2 million in the same period last year. On an adjusted basis, net income was just short of $10 million while earnings per share was $0.11.

Total revenue of $59 million, while up 14% compared with Q4, increased to notable 73% compared to third quarter. The decline in revenue from Q4 of last year was primarily due to lower M&A fees and lower commissions.

Partly offsetting this decrease was a 30% increase in underwriting fees led by growth in the blockchain and cannabis sectors. Pro forma also benefited from higher returns of principal inventories this quarter, reflecting improved equity market conditions.

And lastly, Richardson GMP reported net income of $4.4 million on total revenue of $75.4 million, another strong performance for that firm. While our results were encouraging and represent our strongest quarterly earnings since Q2, 2014, as fellow shareholders, we know there's always opportunity to improve.

Looking back at the full year, 2017 saw the continuation of a multi-year bare [ph] market in commodities, which remained in encumbrance on client activities and in turn, our financial performance. This was most evident in our mining and energy businesses, where activity has remained stubbornly low.

In fact, the dollar value of industry-wide equity underwriting transactions completed in 2017 in the energy market and mining sectors was down 52% and 27% respectively. It would be a gross understatement that these -- to state that these are daunting cyclical conditions.

In addition, we continue to be challenged by technological disintermediation, which has resulted in the commoditization of parts of the business that once were very lucrative. However, as I noted in my opening remarks, providing a much-needed counterbalance to these cyclical lows was the emergence of significant opportunities in burgeoning blockchain cryptocurrency and cannabis sectors.

In particular, client activity in blockchain picked up considerably in the fourth quarter and into 2018. GMP ended 2017 with total revenue of $187 million.

Revenues decreased 5% in 2017, primarily due to lower advisory revenue, which decreased 30% at lower principal transaction net gains. Lower commissions on muted client trading activity also contributed to the increase -- decrease.

Expenses after excluding adjusting items decreased 11% in 2017 compared with the same period a year ago. A byproduct of heavy lifting on the cost side of the business over the past several years is a very meaningful boost to the firm's operating leverage.

On an adjusted basis, net income was $18.8 million this year and diluted EPS was $0.18. Let me now walk you through the quarterly financial highlights for our two business segments.

Capital markets reported fourth quarter pretax earnings of $13.6 million, up from $12.6 million in Q4 last year. Although revenue declined 12% compared with Q4 last year, expenses dropped a notable 16%.

The decrease in revenue to just over $55 million was driven by a 14% decline in investment banking fees and lower commission revenue. Weaker client trading activity compared with a strong fourth quarter last year caused commissions to be lower as well.

Let me briefly expand on each of these areas. The decrease in investment banking revenues was driven by the 54% drop in M&A fees.

Fourth quarter 2016 included two sizable advisory mandates in the energy and mining sectors. By a wide margin, the largest bright spot in the quarter came from a strong performance in our underwriting business.

Their fees rose 30%, led by robust activity in the blockchain cryptocurrency and cannabis sectors, including transactions for HIVE Blockchain Technologies, Hut 8 Mining, MedReleaf, Aurora Cannabis, and Drone Delivery Canada. The proliferation of blockchain companies on Canadian Exchanges this quarter has been a much welcome contributor to our growth.

Together with cannabis, which we report under technology and healthcare, these sectors have rapidly become meaningful business aisles for our firm and a significant source of diversification. While we are proud to continue to be recognized as leaders in all things commodity, an area of source stream for our firm, we've always maintained a strong non-commodity franchise.

Moreover, we have retained the ability to react quickly to new opportunities as evidenced by our performance in blockchain cryptocurrency and cannabis. For the first time in well over a decade, underwriting fees in our non-commodity businesses surpassed those in commodities and accounted for 67% of total underwriting fees in 2017.

GMP Securities has rapidly established itself as one of the leading players in the finance world in matters relating to distributed ledger technology. Recently, our blockchain investment banking team was awarded TopGun distinction by Brendan Woods.

And in energy, we are beginning to see some signs that conditions are following with the price of oil rising past $63 a barrel. We have seen deals for whitecap resources in December and value were up in energy in January of 2018, after a prolonged trough and the industry participants kept questioning whether investors will ever buy a barrel of oil again, oil activity is clearly rebalancing.

That said, the policy stances at both Ottawa and the provisional government in DC [ph] represent real impediments to the return of international capital to the Western Canadian oil patch. Further, we note a solid start to the first quarter with blockchain and cannabis companies, again, leading the charge.

The pace and dialogue with clients has accelerated and our pipeline of activity is stronger than it has been in sometime. In sales and trading, commission revenue decreased to $9.5 million for the quarter, largely reflecting lower client trading activity.

Turning now to principal transactions, where net gains of $10.4 million this quarter compared favorably with $6.1 million last year. Increase is largely driven by higher returns and principal inventories acquired in connection with corporate finance mandates.

Lower losses in connection with client trade facilitation amid more favorable equity market conditions also contributed to the increase. Probably offsetting this decrease was lower client fixed income trading in our U.S.

operations. With that, let's turn to Wealth Management where Richardson GMP reported adjusted EBITDA of $12.6 million.

Assets under admin ended the quarter at $30.5 billion, up 4% from Q4 last year. The number of advisory teams at 182 results in an average AUA per advisory team of approximately $168 million, the highest in the industry.

Richardson GMP continues to be an example of what can be accomplished by an independent Canadian wealth manager with scale, bespoke wealth solutions, and a differentiated ownership structure. Unlike its competitors, Richardson GMP remains steadfast in not mixing advice with the sale of house product.

The strength of this value provision for high net worth households in Canada is evidenced by the firm's ongoing strong financial performance. And now, I'll turn it over to Deb for a review of expenses.

Thanks Harris. Total expenses of $49.6 million this quarter decreased 15% compared with Q4 last year, largely reflecting lower employee compensation and benefits, which decreased 17% to $33.2 million this quarter.

The decrease was led by a 22% drop in the variable compensation, mainly in our capital markets business segment. This drop compares favorably with the 14% decline in revenue over the same period.

Share based compensation was $3.1 million -- was up $3.1 million, was $1.3 million lower compared with Q4 last year, largely due to the expiration of certain employee incentive arrangements during first quarter of 2017. Non-compensation expenses decreased 12% from Q4 last year.

The decrease largely reflects lower professional fees and lower trading related costs commensurate with lower commissions. It's worth noting that total expenses, as a percentage of revenue, dropped 5% over the same period, which is a testament to our commitment to running lean and remaining agile.

This has provided the flexibility to be able to capture and merging revenue opportunities. We are clearly benefiting from the heavy lifting completed on the cost side of the business.

Our structure is highly variable. Our capital position is stronger than it's been in some time.

We ended the year with net working capital of approximately $180 million, up from $150 million at the end of the third quarter. The quarter past evidences that our cost structure and capital position are sound and, as such, provide the capacity to shift our focus to driving revenue opportunity.

And I will turn it back over to Harris for closing remarks.

Thanks Deb. Let me close with the following thoughts on the state of our franchise.

2017 was all about of our firm's ability to respond to opportunities. We entered 2018 as a lean and agile franchise.

We have retained the capacity to move quickly and capitalize on the emerging opportunities in blockchain cryptocurrency and cannabis. This capability can be traced back to two essential factors; first, entrepreneurialism has always been and will continue to be a key component of our DNA.

What we've also done best is identify emerging trends in the small to mid-cap space and partner early with entrepreneurs to give them access to the capital they need to grow their business. And second, and perhaps more importantly, we have been discipline in running our operations extremely lean, while simultaneously, maintaining solid capital position.

We ended the year with net working capital of approximately $180 million as Deb mentioned previously. Collectively, this provides the capacity to dynamically respond to and capitalize on emerging opportunities.

Protecting this capability remains our top priority. We also remain encouraged by the ongoing earnings momentum and strength of our Wealth Management business.

And we will continue to play a crucial role in connecting Canadian small and mid-cap companies with the advice and capital necessary to grow their businesses regardless of sectors. With that, I want to thank everyone for participating in today's call.

This concludes our remarks for the quarter and we look forward to updating you during our Q1 call.